NEWS TICKER, TUESDAY, MARCH 3RD 2015: The number of Spaniards registered as unemployed fell by 13,538 people in February, a fall of 0.3%. Even so, the government acknowledges that a massive 4,512,153 people remain without work. In a press release, the Ministry for Employment says said reduction in jobless was best monthly improvement in February since 2001. Seasonally-adjusted unemployment fell by 49,653 people. The government also says 300,333 fewer unemployed people since February 2014 was: "the largest year-on-year reduction in unemployment since 1999". The total number of unemployed Spaniards this month—the fourth February with Mariano Rajoy as Prime Minister—was still higher than all of the February data points for the last four years of the Zapatero government. The number of people registered with Spain's social security system rose by 96,909 in February - Record high inflows send Japanese ETFs’ AUM higher, surpassing $160bn. The Apac region excluding Japan has also seen strong inflows, pushing the AUM mark past $78bn. Investors are still avoiding the riskiest names in the region; firms whose CDS spreads have widened the most have seen negative returns - CBOE Futures Exchange reports February average daily volume in VIX futures was 166,547 contracts, a decrease of 23% from February 2014 and a decrease of 27% from January 2015. Total volume in VIX futures for February was 3.2m contracts, down 23% from a year ago and down 31% from the previous month - The Straits Times Index (STI) ended +1.03 points higher or +0.03% to 3403.89, taking the year-to-date performance to +1.15%. The FTSE ST Mid Cap Index declined -0.39% while the FTSE ST Small Cap Index declined -1.14%. The top active stocks were SingTel (+0.47%), DBS (-1.48%), OCBC Bank (-0.86%), Noble (-3.08%) and UOB (-0.04%). The outperforming sectors today were represented by the FTSE ST Consumer Goods Index (+0.68%). The two biggest stocks of the FTSE ST Consumer Goods Index are Wilmar International (+0.31%) and Thai Beverage (+2.14%). The underperforming sector was the FTSE ST Basic Materials Index, which declined -3.44% with Midas Holdings’ share price gaining +1.61% and Geo Energy Resources’ share price declining -1.57%.
The three most active Exchange Traded Funds (ETFs) by value today were the STI ETF (-0.29%), IS MSCI India (+0.37%), SPDR Gold Shares (+1.10%). The three most active Real Estate Investment Trusts (REITs) by value were Ascendas REIT (+1.62%), CapitaCom Trust (-0.57%), CapitaMall Trust (+1.90%). The most active index warrants by value today were HSI25000MBeCW150330 (-7.69%), HSI24200MBePW150429 (-3.94%), HSI24400MBePW150330 (-7.32%). The most active stock warrants by value today were OCBC Bk MBeCW150803 (-13.56%), UOB MB eCW150701 (-1.97%), DBS MB eCW150420 (-22.61%).

ECB bond purchases: the case for Spain and Italy

ECB bond purchases: the case for Spain and ItalyThe European Central Bank (ECB) is feeling the pressure to add to its balance sheet massive amounts of sovereign debt from eurozone countries that are in distress. Assuming that the bank was to do so, with the clear objective of sharply reducing those countries' long-term interest rates, it begs the question, would the eurozone crisis then be solved?
If we were to consider this in the context of Spain and Italy, we would argue that it could only happen if the bank’s intervention not only restored the fiscal and external solvency of the countries in distress, but also revived growth. While these objectives would be fairly easily achieved in Italy, they would not rescue Spain. In fact, even a massive intervention by the ECB in government bond markets would not pull Spain out of its crisis.http://www.ftseglobalmarkets.com/

The European Central Bank (ECB) is feeling the pressure to add to its balance sheet massive amounts of sovereign debt from eurozone countries that are in distress. Assuming that the bank was to do so, with the clear objective of sharply reducing those countries' long-term interest rates, it begs the question, would the eurozone crisis then be solved?

If we were to consider this in the context of Spain and Italy, we would argue that it could only happen if the bank’s intervention not only restored the fiscal and external solvency of the countries in distress, but also revived growth. While these objectives would be fairly easily achieved in Italy, they would not rescue Spain. In fact, even a massive intervention by the ECB in government bond markets would not pull Spain out of its crisis.

Strong pressure on the ECB

The high level of long-term interest rates in Spain and Italy is stifling their economies. Strong pressure is therefore being put on the ECB to buy large quantities of government bonds issued by these countries, in the hope it will sharply reduce their long-term interest rates. This could be done directly or indirectly, perhaps by transforming the European Stability Mechanism (ESM) into a bank with funding provided by the ECB.

Massive purchases of government bonds by the ECB: Would the eurozone crisis be ended?

If massive purchases of government bonds by the ECB were to resolve the debt situation in Spain and Italy, the consequential fall in interest rates would need to restore fiscal solvency, restore external solvency and bring back acceptable growth.

Let’s look at these three points now:

1. Fiscal solvency

Fiscal solvency is ensured if the primary budget surplus is greater than the public debt multiplied by the differential between the long-term interest rate and nominal long-run growth.

If long-term interest rates were lowered by ECB interventions to close to the eurozone average, a primary surplus of 4.2 percentage points of GDP would be needed in Italy and 2.8 percentage points of GDP in Spain to ensure fiscal solvency. Italy’s primary surplus is forecast to meet 4% of GDP next year, while Spain’s primary deficit is due to exceed 3%.With lower interest rates Italy would be fiscally solvent in 2013, but by no means would Spain be.

2. External solvency

External solvency is ensured if the primary surplus (excluding interest on external debt) of the current-account balance is greater than the external debt multiplied by the differential between the long-term interest rate and nominal growth.

If the ECB moved long-term interest rates closer to the eurozone average, a primary current-account surplus of 0.8 percentage point of GDP would be needed in Italy, and 3.1 percentage points of GDP in Spain. At present, Italy has a deficit of 1.8 percentage points of GDP, and Spain has a deficit of 2.5 percentage points. As such, with lower interest rates, external solvency would not be guaranteed in Italy, while in Spain, again, the situation is far worse – external solvency would be very far from guaranteed.

3. Growth

The growth prospects are dramatic for Spain and Italy. A fall in long-term interest rates would significantly impact growth in a positive way, but only if the contraction in activity was predominately due to the high level of long-term interest rates. This would be the case if the contraction itself occurred because there was a decline in investment, rather than anything else such as job losses or deleveraging.

While consumption is declining in both countries, the decline in investment is far more dramatic in Spain than in Italy. The sharp decline in investment in Spain can be attributed to the collapse of the construction sector and the need for deleveraging, a problem which is far more acute in Spain than in Italy. As a result, a fall in interest rates would not be sufficient to revive growth in Spain, but would help in Italy.

Conclusion: Would massive purchases of Spanish and Italian government bonds by the ECB stop the eurozone crisis?

In conclusion, if the ECB were to purchase massive amounts of government bonds issued by struggling eurozone countries, a sharp fall in long-term interest rates in Spain and Italy would:

restore fiscal solvency in Italy but not in Spain;

restore external solvency in neither of the two countries, though the problem is far more serious in Spain than in Italy;

revive growth in Italy, but not in Spain where the decline in activity does not stem mostly from high interest rates.

Massive intervention by the ECB in government bond markets would therefore be decisive for Italy, but much less so for Spain.

A graduate of Ecole Polytechnique, of Ecole Nationale de la Statistique et de l'Adminstration Economique and of Institut d'Etudes Politiques de Paris, Patrick Artus is today the Chief Economist at Natixis. He began his career in 1975 where his work included economic forecasting and modelisation. He then worked at the Economics Department of the OECD (1980), before becoming Head of Research at the ENSAE. Thereafter, Patrick taught seminars on research at Paris Dauphine (1982) and was Professor at a number of Universities (including Dauphine, ENSAE, Centre des Hautes Etudes de l'Armement, Ecole Nationale des Ponts et Chaussées and HEC Lausanne).

Patrick is now Professor of Economics at University Paris I Panthéon-Sorbonne. He combines these responsibilities with his research work at Natixis. Patrick was awarded "Best Economist of the year 1996" by the "Nouvel Economiste", and today is a member of the council of economic advisors to the French Prime Minister. He is also a board member at Total and Ipsos.